Profit from the Coming Algae Oil Boom

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Author: Greg Guenthner

Algae oil is now the most promising source of alternative energy on the planet. But don’t just take my word for it â€" the world’s biggest energy player agrees. ExxonMobil is the Big Oil player that’s causing all the fuss. The company has thrown $600 million into a research partnership to study the potential of algae oil. Now, ExxonMobil will team up with human genome researcher Craig Venter in an attempt to make algae oil a more viable fuel source. “There has been so much hype and hope about the potential for algae that this announcement should act as a reality check for everyone,” Venter told the Financial Times. Up until this point, the algae oil industry was rarely mentioned in mainstream media sources. Yet it remains one of our most viable alternatives to conventional fossil fuels. The argument is simple: Algae are the fastest growing plants in the world. And algae consume more carbon dioxide than any other plants. As they grow, algae produce lipids, or vegetable oil. The math is greatly skewed in favor of algae. One acre of corn can yield about 28 gallons of oil in one year. In more tropical regions, an acre of palms can yield about 6,700 gallons of oil per year. An acre of algae can yield anywhere between 20,000-100,000 gallons of oil per year. This tremendous potential exists because of a lightning-fast growth cycle. An algae plant can completely reproduce up to six times per day. And we all know it takes corn all summer to mature. Why Ethanol Doesn’t Grow Any Profits Oil is all over the place. It’ll get crushed one day and then bounce right back into the $40s the next. And while the volatility in the oil market probably won’t change anytime soon, thanks to an uncertain economy, there is something distinctly different about the way we’re reacting to the comeback of cheap gas. No, the green movement won’t just go away. Consumers continue to demand more earth-friendly products. A sense of urgency over climate change and OPEC’s stranglehold over our oil supply continues. We continue to seek alternatives. But alternative energy’s next wave needs to prove it can sustain once the hype dies down. Take ethanol. At first glance, 2006 looked like a great year to be in the ethanol business. Shares of Pacific Ethanol were on fire, shattering the $20 mark by the end of March. By May, shares broke $40. Bill Gates’ millions helped jump-start the stock, and new government mandates all but ensured the success of the corn-to-fuel business. As time would soon tell, the spring of 2006 proved to be a great time to sell your ethanol holdings. Pacific Ethanol’s light is not shining quite as brightly as it once was. The stock is more than 98% off its 2006 high, and Gates is steadily unwinding his stake in the company. Pacific has been plagued with problems recently. The company’s most recent annual report is chock-full of problems, including violations of some debt covenants and other shenanigans involving the company’s line of credit. But the bigger problem is that you can’t sell ethanol for more than it costs to make it. One would think that would kill this business off entirely. But thanks to inexplicable government support and backward-thinking energy legislation, ethanol production will most likely continue despite the tough lessons we’ve learned. So the big question remains â€" can someone successfully develop an alternative energy source that will actually make money? Do the Math: 20,000 > 28 When you look at the numbers, one particular alternative energy source makes a whole lot of sense: algae. One acre of corn gives you 28 gallons of oil in a year. An acre of algae can yield anywhere between 20,000-100,000 gallons of oil per year. No wonder the updated 2007 Energy Independence and Security Act supports extracting fuels from algae. While the algae fuel field is not completely crowded, multiple players are developing, harvesting and extracting systems that could one day be industry-standard designs. In as little as three years, we could see a powerful new energy industry. Chevron and Shell have started exploring the possibilities of algae. There are also a few small companies that are working on the technology. With the coming transition to alternative fuels, early investors in algae oil stand to claim some huge gains if this technology takes off… Potential Algae Penny Plays Of course, ExxonMobil’s new partnership does not mean we will be filling our tanks with pond scum biodiesel just yet. Developers will still need to tackle genetic engineering and oil extraction issues… But ExxonMobil’s leap into the algae oil market effectively legitimizes the industry. But as you probably have already guessed, the budding algae oil industry offers very few public companies in which you can invest. However, there are a few compelling names you’ve probably never heard of… Here are three algae penny plays you might want to watch. All of these stocks have a market cap under $2 million, a share price under 10 cents, and can be found on the Pink Sheets and Over-the-Counter Bulletin Board: • GreenShift Corporation (OTC: GERS) • Nanoforce Inc. (PINK: NNFC) • PetroSun Inc. (PINK: PSUD) Several private startups and partnerships are worth watching, too… We’ve mentioned Sapphire Energy before. It’s scored more than $100 million in private financing â€" including a chunk from Cascade Investment, a holding company owned by Bill Gates. Then there’s Algenol Biofuels. This company has partnered with Dow Chemical on a project that would use algae as a vehicle to harvest CO2 for ethanol. “The ethanol would be sold as fuel,” reported The New York Times, “But Dow’s long-term interest is in using it as an ingredient for plastics, replacing natural gas. The process also produces oxygen, which could be used to burn coal in a power plant cleanly, said Paul Woods, chief executive of Algenol, which is based in Bonita Springs, Fla. The exhaust from such a plant would be mostly carbon dioxide, which could be reused to make more algae.” The company’s target price is $1 a gallon â€" incredibly cheap compared with corn-based ethanols. A breakthrough like this one could put the U.S. on the road to energy independence at breakneck speeds. We’ll keep you posted… Best, Greg Guenthner

Greg Guenthner is a contributor to The Penny Sleuth, which offers unbiased commentary from expert analysts and authors about penny stocks.